To The Point
News from First Tier Accounting
August 2012
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| This Month's Quote | |
Think Like an Olympian - "I think that everything is possible as long as you put your mind to it and you put the work and time into it. I think your mind really controls everything." - Michael Phelps
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| Fun Fact | |
Over the last two decades, small and new businesses have been responsible for creating 2 out of every 3 net new jobs, and today's small businesses employ half of the private sector workforce in America. Nothing "small" about that!
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First Tier Accounting is committed to helping small businesses maintain accurate and timely accounting records, understand their financial data and use this information to better manage business operations.
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| Greetings! |
 Greetings!
As our economy continues to grow, more and more businesses are hiring people to meet the demand for their services or products. Recently, I've had a lot of questions from clients on issues related to payroll taxes, reporting and independent contractor status. There are many rules and regulations when it comes to staffing, so I can't possibly cover every instance. However, I thought I would share some basic helpful information on two areas that cause a lot of trouble for small businesses if not handled properly: independent contractors and payroll taxes.
This month I will focus on the distinction between an employee and an independent contractor. Errors in this area can be very costly to small businesses, so it is imperative that you have personnel properly classified to avoid fines and back taxes.
Next month I will share with you an overview of payroll taxes, including types of taxes, reporting requirements, payment issues and some tips for keeping tabs on it all.
If you have specific questions related to your business and employees, please feel free to contact me to discuss in more detail.
Have a great month!
Tracey
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| Employees vs Independent Contractors - What's the big deal? | As a small business owner, you may hire people as independent contractors or as employees.
How you classify these people affect a number of things, including how much you pay in taxes, whether you need to withhold taxes, and what documents you need to retain and to file. The classification also affects the individuals eligibility for social security and Medicare benefits,
employer-provided benefits and income tax. Improper classification can result in fines and penalties, along with back taxes assessed against the business. So, as you can see, it is worth a little time and effort to determine what is the proper classification for the people you hire.
The IRS uses three main criteria to determine the relationship between businesses and workers: - Behavorial Control - how/when/where the work is to be done, what tools are required, who should assist, and where to purchase supplies and services.
- Financial Control - who controls the financial aspects of the worker's job
- Type of Relationship - how the business owner and worker perceive their relationship
Aspects of a typical employee are:
- Receives extensive instructions and/or training on how the work is to be done
- Required to work specific hours or a specific schedule as determined by the employer
- Eligible to have business expenses reimbursed
- Eligible for company-provided benefits, such as insurance, pension, or paid leave
- Employer must withhold income taxes and employee's share of Social Security and Medicare
- Employer must pay their share of Social Security and Medicare, as well as federal and state unemployment taxes
- Employer must provide a W-2 to employee by Jan 31 of the following year
- Forms W-4 and I-9 must be filled out by employee and kept on file at business office
Aspects of a typical independent contractor are:
- Does not receive extensive training or instruction on how work is to be done
- Has a significant investment in their work, such as providing their own tools and equipment
- Is not typically reimbursed for business expenses
- Can realize a profit or loss from the work being performed
- Is not eligible for employer-paid benefits
- Has a written contract showing that an independent relationship is intended
- May have a Form 1099 issued for the amount paid during the calendar year
- Is responsible for paying their own income tax and self-employment tax
- Form W-9 must be filled out by contractor and kept on file at the business office
Both employers and workers can ask the IRS to make a determination of a worker's status by filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The form can be obtained on the IRS's web site - it also may be helpful for you to just review this form to see the types of questions the IRS uses to determine status.
For more information on Employee vs Independent Contractor, you can visit www.irs.gov and refer to Publications #15-A, #1779 and #1976. Or you may call the IRS directly at 1.800.829.3676.
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QuickBooks Corner
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QuickBooks has some built-in features that allow you to easily track payments to independent contractors and to issue 1099s at the end of the year. To set up an independent contractor in QuickBooks, perform the following steps:
- In Vendor Center, click on New Vendor. Enter the name, address and contact info for the independent contractor.
- On the Additional Info tab, fill in the Tax ID. If the contractor should be issued a 1099, click on the box for "Vendor Eligible for 1099". NOTE: If you are unsure whether they must be issued a 1099, consult your tax accountant.
In order to print the 1099 forms from QuickBooks, you will need to activate that option under Edit > Preferences > Tax: 1099. For assistance with setting this up or questions on printing your 1099 forms, please contact me at tracey@FirstTierAccounting.com.
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